Short-term MTA Financial Outlook Continues to Improve;
Defective Railroad Ties Could Cost Up To $125 Million

The short-term financial outlook for the Metropolitan Transportation
Authority (MTA) continues to improve and the 2005 surplus could total
$928 million, which is $95 million more than projected by the MTA,
according to a review of the MTA’s financial plan issued today
by State Comptroller Alan G. Hevesi. The report is critical, however,
of the MTA’s proposal to use a portion of the surplus to construct
a platform over the Long Island Rail Road yard on the West Side of
Manhattan. While the 2005 surplus is likely to be larger than projected
by the MTA, the report also found that replacing defective concrete
railroad ties over the next three years could cost $80 million more
than set aside by the MTA.

The MTA projects a surplus of $833 million in 2005 as a result of
State actions that increased taxes and fees, higher estimates of tax
revenues, and a larger 2004 surplus. Of this amount, $481 million represents
a windfall from higher real estate transaction tax revenues and lower
debt service costs that the MTA would like to use to construct a platform
over the West Side rail yard. The MTA would also construct a new headquarters
at the site, which would permit the MTA to sell its midtown properties
to help fund the next capital program. The report finds that the 2005
surplus could total $928 million based on higher estimates of real
estate tax revenues ($75 million in 2005) and a $40 million reserve
that is unlikely to be needed, partly offset by higher energy costs
due to hurricanes Katrina and Rita ($20 million). The report notes
that while the short-term outlook continues to improve, the budget
gaps for 2008 and 2009 are large and essentially unchanged since the
February Plan.

The State Comptroller continues to advocate that the MTA sell its
midtown properties and to support development of the rail yards, but
this could be done without the MTA constructing a platform. For example,
the MTA has already rejected a $400 million offer from Cablevision,
which had agreed to build a platform at its own expense.

“Developers—not commuters and taxpayers—should pay
for constructing a platform as part of any development deal and assume
the risks of delays, cost overruns, and the timing of the real estate
market,” said Hevesi. “Instead of building a new headquarters
on the West Side, the MTA should explore moving downtown, which would
support State and City efforts to rebuild Lower Manhattan.”

Coincidentally, the cost of the platform is about equal to the tax
and fee increases approved by the State for 2005 and 2006. Given the
size of the 2005 surplus, it is now apparent that the tax and fee increases
were unnecessary and the MTA could have waited until 2007 for State
assistance.

“The State Legislature did not raise taxes and fees so the MTA
could build a platform,” said Hevesi. “These resources
should either be used in ways that directly benefit commuters, such
as deferring planned fare and toll hikes, or returned to the taxpayers.”

The report also found that the Metro-North Railroad and the Long Island
Rail Road (LIRR) purchased 270,000 concrete ties from the same manufacturer
in 1997 and 1998, but many are deteriorating prematurely despite the
fact that the MTA hired a quality assurance consultant to oversee the
production process. According to the railroads, spot replacement is
not practical or cost effective in track segments where there is a
significant number of deteriorating concrete ties and replacement of
all the ties in these segments is necessary to avoid service disruptions.
The LIRR purchased another 39,000 concrete ties from the same manufacturer
in 2001 and these ties are also showing signs of premature deterioration.
Concrete ties were expected to have a longer useful life than wooden
ties—50 years compared to 30 years. However, many of these concrete
ties purchased by the MTA are lasting for only seven or eight years.

The concrete ties are covered by a 25-year warranty, which the railroads
maintain covers both the replacement of defective ties and the much
greater cost of installation. The manufacturer disputes the extent
of the warranty but the MTA reserves its right to pursue claims against
the manufacturer for the cost of installation. The statute of limitations
to sue the quality assurance consultant for malpractice has passed.
The MTA will initially fund the $44.2 million cost of installing 116,000
concrete ties scheduled to be replaced through 2007 out of the operating
budget pending the outcome of negotiations with the manufacturer.

Metro-North plans to spend $14 million to replace 52,000 of the 206,000
concrete ties that it purchased in 1997 and 1998.

Metro-North will periodically inspect the remaining 154,000 ties
that are showing some signs of premature deterioration. Metro-North
has no plans to replace them at this time, although it may become
necessary depending on the outcome of inspections and the analysis
of outside experts.

Through late May, the LIRR had already spot-replaced more than
800 concrete ties that had completely failed. Metro-North has spot-replaced
a similar number.

The LIRR plans to spend $30.2 million to replace all of the 64,000
concrete ties that it purchased during 1997 and 1998, although
the actual number replaced could be less depending on the outcome
of inspections and the analysis of outside experts.

The LIRR purchased another 39,000 concrete ties from the same manufacturer
in 2001. The LIRR will conduct periodic inspections of these ties,
which may also need to be replaced.

The report finds that the MTA could incur additional operating budget
costs of up to $80 million if the remaining 193,000 concrete ties purchased
from this manufacturer since 1997 need to be replaced. Alternatively,
the MTA could realize savings of $44.2 million in the event that the
manufacturer covers all the costs associated with the defective ties.

“Concrete ties are expected to last 50 years but these didn’t
even last ten, and now the job needs to be done a second time. This
will cost money the MTA can ill-afford and will mean service disruptions
for riders,” said Hevesi.